How Should I Evaluate Media Tech Companies?

"Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Marcus Pratt, vice president of insights and technology at Mediasmith.

Part of my job involves evaluating media technology companies. This is extremely fun but is sometimes frustrating. The vibrant marketing tech economy creates many choices for buyers, but finding points of differentiation is not always easy.

Worse yet, the definition of a technology company is murky, at best. Here are some of the questions I ask myself when evaluating media technology offerings.

1. Am I buying technology or service?

Many media technology offerings are not actually selling technology, or perhaps technology is a very slim part of the offering. Sometimes the company is really selling service or offering media buying. To help figure out what is actually being sold, I ask to see a demo early on. Any company operating on a Software-as-a-Service (SaaS) model should be eager to show off its user interface. Offerings that rely more heavily on service or bundle their technology along with media buying are more likely to have technology offerings that are implemented “on the back end” by a specialized team.

There are distinct benefits to both pure-play SaaS offerings and service offerings but it helps to be clear upfront on your needs and the ideal solution. There is a big difference between buying Microsoft Word and hiring a writer – which one do you need? Understand your requirements and ask vendors where their offerings fit.

To confuse matters, there are a number of companies that sell on a SaaS-based model and also offer managed services. These can be the best of both worlds, but often fall short in one area. Not many people would ask Microsoft to write on their behalf. Similarly, you would be hard-pressed to find a great writer who also developed word processing software.

Look at the strengths and focus of the companies you are evaluating. Most lean towards either building products or servicing clients.

2. What’s the difference?

Many technological claims made in media are hard to measure. A few years ago, several demand-side platforms bragged about having the best queries per second (QPS), claiming it allowed access to greater inventory, better pricing and more efficient use of algorithms. That all sounds good, but there were no independent measurements of QPS. During a six-month period, at least three vendors told me that they knew they had the highest QPS. I highly doubt all were correct.

To help find points of differentiation between competing tech companies I tend to look at the following:

Executive vision: Who is in charge and where do they want to take their company? If you don’t know, a lot can be inferred by looking at past work history, hiring choices and funding details.

Reality check: What does the product look like today? Again, asking for a demo helps answer this question.

Integration with others: The digital media industry is built on openness. Chances are you will need your tech solutions to play well together. Look for a list of partnerships or specifically ask about companies that are important to you. Examples include ad servers, attribution vendors, inventory sources, data providers or research vendors.

Access: Is the technology accessible in a way that works for your organization? API access could be a must, or perhaps you need robust reporting to mobile devices?

Intellectual property: What part of the company’s data, inventory or technology is proprietary?

The competition: What does the vendor see as a key benefit over competitors?

Keeping these points in mind will help you answer the question: What makes this offering different than my current set of partners?

3. How do they make money?

You can tell a lot about a vendor’s incentives by their pricing model. Tiers, minimums and other fees can further complicate these, but there are three common pricing models you may encounter.

Percentage of media spend is the commonly used model for SaaS companies. This total cost is easy to calculate, and the vendor’s primary incentive is for you to increase spending through their software. Increases in budget usually follow performance, so goals between buyer and seller are generally aligned.

The second model is CPM upcharge, which is when a flat CPM is charged on top of the media cost for impressions served. This is most common among ad servers and third-party data providers. The model is straightforward, but be aware that the fee, as a percent of spending, increases with low-CPM media plans. A $0.50 incremental CPM may be worth the additional cost on your $20 CPM buys, but it may not on a $1.50 CPM media plan.

Finally, there is the unknown or arbitrage model. The classic ad network or managed service model is for vendors to buy inventory at an undisclosed or non-transparent price and resell it on a fixed CPM. Though arbitrage has become a dirty word in digital media, there is nothing inherently evil about this pricing model. Media buyers never insisted that newspaper publishers disclosed total costs of raw materials, such as paying authors, printing and shipping the paper, and many will not insist on price transparency for digital inventory today.

This model is certainly convenient because buyers can forecast precisely what they will pay for a set number of impressions. The challenge comes with alignment. A vendor operating under this model will want to maximize the spread between CPM paid and sold in order to achieve the greatest profits while delivering strong enough performance to remain on the plan. This does not inherently conflict with the interests of the advertiser, but the vendor is not 100% incentivized to maximize advertiser value.

While the process of evaluating technology solutions is certainly different than evaluating media vehicles, the goal in both cases is to maximize the return on dollars spent.

With more media buys involving evaluations of technology, buyers are encouraged to remember this commonality. If the ad tech consolidation continues, we could have far fewer choices in the coming years, so enjoy your options while they last.

4 Comments

I would add one point to the percentage of media spend pricing model that sometimes gets overlooked. It incents and rewards vendors to buy more expensive media. In your example, 20% of $1.50 is $0.30, while 20% of $20.00 is $4.00.

Good point James. However, if an advertiser has a fixed budget, the total fee will be the same for the campaign. Most of our clients don't increase their budgets if media is pricier, so this is less of an issue for us.

Great points and insights here. I'd add to your list customer support and cultural fit. In my opinion these two go hand-in-hand. When I'm evaluating potential vendors they actually rank as a higher priority. Our teams that work daily with these vendors need to be comfortable that at any minute they can get a knowledgeable rep on the line to work through any issues. Not all ad-tech organizations are created equal in this regard.